1. Lecture 1 - Introduction & fundamentals Flashcards
Which of the following problems is most likely to prevent successful implementation of the EU’s Greendeal?
A) Free market environmentalism
B) Holdin effect
C) Free-rider effect
D) Holdout effect
D) Holdout effect
Which of the following does not represent the same curve?
A) Demand curve
B) Maximum willingness to pay curve
C) Private marginal benefit curve
D) Private marginal cost curve
D) Private marginal cost curve
Which of the following statements is correct about a shift of the demand curve for gasoline?
A) A decrease in the price of public transportation shift the demand curve to the right
B) An increase in the price for gasoline shifts the demand curve to the right
C) A decrease in income shifts the demand curve to the left
D) An decrease in the price of gasoline shift the demand curve to the right
C) A decrease in income shifts the demand curve to the left
Consider a society with two individuals, who value forest preservation. Which of the following statements is true?
A) Their willingness to pay for forest preservation is likely to be the same as their marginal private benefit
B) Their willingness to pay for forest preservation is likely to be higher than their marginal private benefit
C) The marginal benefits of each acre preserved increase with more preservation
D) Their willingness to pay for forest preservation is likely to be lower than their marginal private benefit
D) Their willingness to pay for forest preservation is likely to be lower than their marginal private benefit
Name 5 important conditions for a market system to lead to welfare maximisation.
- Perfect competition
- Homogeneous products
- Perfect information
- Low barriers to enter and exit
- Rational consumers
- Clear property rights and a legal framework
- Externalities are internalized
- Only governments allocate public goods and common resources
- No monopolies
- No inequality
- Consumer protection
- Environmental regulations
- No transaction costs
- Well-defined property rights
How can a negative externality from production lead to deadweight loss?
- The negative externality means producers don’t internalize costs they impose on other parties.
- Because of this, production is at a higher level that what would be efficient from society’s perspectie
- Deadweight loss is the triangle area formed by the difference between the marginal benefit and marginal cost curves
- It represents a loss in economic efficiency
Provide an example of each of the four types of goods
- Public good: Outdoor air
- Club good: Satellite TV
- Common good: public well in Africa
- Private good: Bottled water
What are opportunity costs?
Benefits you would have obtained from spending your resources in an alternative way.
What determines the slope of the demand curve? + Name 2 influencing factors.
Sensitivity of demand to price changes.
Influencing factors:
- Substitution possibilities
- The share of budget you spend on a product
- The type of good
- Consumer preferences
What may cause a demand curve to shift? (Name 2)
- Change in income
- Changing taste
- Price of a substitute(s)
- Market expectations
- Number of buyers
What determines the slope of a supply curve? + Name 2 influencing factors.
Supply sensitivity to price changes.
Influencing factors:
- Input factors required
- The rate of return on input factors
What may cause a supply curve to shift?
- Technological change
- Costs of input factors change
- Fiscal interference
- Number of producers
Define “negative externality” and provide an example.
Negative impacts of a market transaction affecting those not involved in the transaction.
Example: pollution from a factory.
Define marginal cost and marginal benefit
The cost/benefit of producing or consuming one more unit of a good or service.
Define “equilibrium price”
The market price where the quantity supplied equals the quantity demanded.
Define “economic efficiency”
An allocation of resources that maximizes net social benefits; perfectly competitive markets in the absence of externalities are efficient.
Define “positive externality” and provide an example.
The positive impacts of a market transaction that affect those not involved in the transaction.
Example: a land owner who buys and plants trees.
What does the “social marginal cost curve” show?
The cost of providing one more unit of a good or service, considering both private production costs and externalities.
What is meant with a “socially efficient market”?
A market situation in which net social benefits are maximized.
What is a Pigovian tax?
A per-unit tax set equal to the external damage caused by an activity.
Example: a tax per ton of pollution emitted equal to the external damage of a ton of pollution.
What are the two reasons we should not put a Pigovian tax on all products AND what do economists recommend to do instead?
- Determining the appropriate tax level would be a monumental task
- Administrative costs of tax collection might be greater than the revenue from the tax
- Instead, economists recommend to put Pigovian taxes as far upstream as possible.
In the case of a positive externality, what is the most common way to correct a market inefficiency?
Through a subsidy.
True or false: a subsidy can also be a tax credit.
True.
What is a welfare analysis?
An economic tool that analyzes the total costs and benefits of alternative policies to different groups, such as producers and consumers.
True or false: the net social benefits of an automobile market is the sum of consumer and producer surplus.
False.
It is the sum of consumer and producer surplus MINUS the externality damage.
What is the optimal level of pollution?
The pollution level that maximizes net social benefits.
What are the requirements for application of the Coase theorem? And what does the Coase thereom result in?
- Well-defined property rights
- No transaction costs
An efficient allocation of resources will result even if externalities exist.
What is meant with free market environmentalism?
This is the view that a more complete system of property rights and expanded use of market mechanisms is the best approach to solving issues of resource use and pollution control.
What is the free rider effect?
The incentive for people to avoid paying for a resource when the benefits they obtain from the resource are unaffected by whether they pay; results in the undersupply of public goods.
Name a critique of the Coase thereom in terms of equity.
The community may simply be unable to “buy off” the pollute.
It is also possible that, even if the right is assigned to the community, poor communities will accept toxic waste dumps and other polluting facilities out of a desperate need for compensatory funds.
Define “environmental justice”
Environmental justice is the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income, with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies.
What is “surplus”?
A market situation in which the quantity supplied exceeds the quantity demanded.
What is “shortage”?
A market situation in which the quantity demanded exceeds the quantity supplied.
How is elasticity of demand calculated?
Percent change in quantity demanded / Percent change in price
True or false: demand elasticity is a usually a negative number, while supply elasticity is usually a positive number.
True.
Because the quantity demanded moves in the opposite direction of the price, demand elasticity is a negative number.
The mathematical expression for elasticity of supply is the same as for elasticity of demand, but because quantity and price move in the same direction, supply elasticity is positive.
What is consumer surplus?
The net benefit to a consumer from a purchase; equal to their maximum willingness to pay minus price.
What is producer surplus?
The net benefits of a market transaction to producers, equal to the selling price minus production costs (i.e., profits).
What are the characteristics of a public good?
Goods that are
available to all (nonexcludable)
and whose use by one person does
not reduce their availability to
others (nonrival).
What are positivistic and normative economics?
Positivistic economics aims to describe what was and what is.
Normative economics deals with what ought to be from a broad welfare perspective.
What are 3 main take-aways from Smith’s invisible hand theory?
- Maximization of individual welfare contributes to maximization of social welfare.
- Competitive markets take care of an efficient allocation of scarce means through prices.
- Externalities are absent.
True or false: the higher the price elasticity of demand, the steeper the demand curve.
False.
Correct is: the higher the price elasticity of demand, the flatter the demand curve.
Why is the supply curve upward sloping? Provide one answer for the short run and one for the long run.
- Short run: law of diminishing returns
- Long run: in a competitive market the most productive firms produce first
True or false: the higher the elasticity of supply, the flatter the supply curve
True.
True or false: optimality is where the distance between total cost & benefits curves intersects.
False. Optimality is where the distance between total cost & benefit curves is the greatest.
Translated to MARGINAL cost and benefits curves, they would intersect.
Why are pestering and charity not examples of externalities?
Externalities refer to unintended effects.
What is dead weight loss?
Net loss of economic efficiency / welfare that occurs when the socially optimal quantity of production of a good or service is not achieved.
Which three elements constitute an efficient property rights structure?
- Exclusivity: owner bears all costs and benefits, unless sale to others occurs
- Transferability: rights are fully transferable on voluntary basis
- Enforcability: rights are secure (no involuntary seizure by others)
How is GDP calculated?
Through income, expenditure and output
What are transaction costs?
Full costs of an exchange/participate in market, including costs of information
Name the characteristics of public goods and the main problems.
- Low degree of rivalry
- Low degree of excludability
- Problem: no markets, externalities, and underprovision
Name the characteristics of private goods and the main problem.
- High degree of rivalry
- High degree of excludability
- Problem: externalities
Name the characteristics of club goods and the main problem.
- Low degree of rivalry
- High degree of excludability
- Problem: natural monopolies because of economies of scale
Name the characteristics of common goods and the main problem.
- Low degree of rivalry
- High degree of excludability
- Problem: overextraction, usually because of ill-defined property rights
How is the desirability of actions/policies judged in economics?
Through cost-benefit analysis.
